By Thomas | financial enthusiast
My investing diary: special entry.
For most of my early investing life, I ignored bonds completely. Why own something that earns 2-3% when stocks return 10%? It felt like choosing a bicycle when a car was available.
Then 2022 happened, and I had to rethink everything.
What Stocks and Bonds Actually Are
Stocks are ownership stakes in companies. When you buy a share of Apple, you own a tiny fraction of Apple's future profits, growth, and assets. If Apple does well, your stake becomes more valuable. If it fails, your stake loses value — all the way to zero in a bankruptcy. High ceiling, lower floor.
Bonds are loans. When you buy a US Treasury bond, you're lending money to the US government. They promise to pay you interest (the coupon) at regular intervals and return your principal when the bond matures. The risk is much lower — the US government has never defaulted on its debt — but the reward is lower too.
Corporate bonds sit somewhere in between: higher yield than Treasuries (because companies are riskier than the government) but lower yield than stocks (because you're a creditor, not an owner).
The Historical Return Numbers
The S&P 500 has returned approximately 10% per year on average over the long run. Adjusted for inflation, that's about 7% real return. That is an extraordinary wealth-building machine if you're patient.
The 10-year US Treasury bond currently yields about 4.3% (as of 2026). That's actually quite decent compared to the near-zero rates we saw in 2020-2021. You lock in that yield; it doesn't grow, but it's guaranteed.
Over very long periods, stocks beat bonds by a wide margin. Over very short periods, bonds can beat stocks — especially during stock market crashes when panicked investors flee to safety and drive bond prices up.
The Correlation That Broke Down in 2022
The classic argument for holding both stocks and bonds is the inverse correlation: when stocks fall, bonds often rise. Investors flee equities and buy "safe" Treasuries, pushing bond prices up and softening the blow.
This was the logic behind the famous 60/40 portfolio — 60% stocks, 40% bonds. When stocks crash, the bonds cushion the fall. The blended portfolio is less volatile than 100% stocks.
I relied on this assumption without really questioning it.
Then 2022 happened. The Federal Reserve hiked interest rates aggressively to fight inflation. And here's the thing about bonds that I should have understood better: when interest rates rise, existing bond prices fall. Because why would anyone buy your 2% bond when new bonds are offering 4%?
In 2022, both stocks and bonds fell simultaneously — and hard. The classic 60/40 portfolio had one of its worst years in decades. The inverse correlation that everyone relied on broke down completely.
Damned. The safety net had a hole in it.
This doesn't mean bonds are useless — 2022 was an unusual confluence of high inflation and aggressive rate hikes. The inverse correlation generally holds in normal recessions. But it taught me to not assume diversification works the same way in every environment.
When Bonds Actually Make Sense
Bonds start to make sense when you're approaching or in retirement. The logic shifts completely.
If you're 30 years old, you have 30-40 years before you need this money. Market crashes are temporary. You can ride them out and let compounding do its work. You don't need bonds — you just need time.
If you're 62 and retiring in three years, a 40% market crash right before you need to start withdrawing money is catastrophic. You'd be forced to sell stocks at depressed prices to fund your living expenses. That crystallizes losses that a younger investor could just wait out. Bonds provide stability and income that doesn't depend on stock market levels.
This is the logic behind the age-based allocation rule. The old rule of thumb was 100 minus your age equals your stock percentage. Updated versions use 110 or even 120 to account for longer lifespans. If you're 40, maybe 70-80% stocks, 20-30% bonds. At 65, maybe 50-50 or even 40-60.
The 4.3% Yield Conversation
At near-zero interest rates (which we had 2020-2021), bonds were genuinely terrible. Locking money into a 10-year Treasury at 0.5% made almost no sense unless you were extremely risk-averse or very close to retirement.
At 4.3%, the conversation is different. A guaranteed 4.3% on money you won't need for a decade is not nothing. It's not spectacular compared to expected equity returns, but it's real, dependable, inflation-hedging return.
I've started allocating a small portion of my portfolio to Treasury bonds specifically because the current yield is meaningful. This isn't something I would have said three years ago.
Bonds as a Buffer, Not an Investment
Here's my fundamental reframe: bonds are not an investment in the wealth-building sense. They're a buffer.
You hold bonds to reduce volatility, to protect against the specific sequence-of-returns risk near retirement, and — at current yields — to collect a modest income that doesn't require market participation.
You don't hold bonds to get rich. You hold bonds so you don't get poor right when you need the money.
For a 25-year-old building wealth from scratch, a 90-100% equity allocation is entirely defensible. You have time and volatility tolerance. Bonds just drag on returns.
For a 60-year-old who has built substantial wealth and now needs to protect it: bonds are essential. Protecting what you have becomes more important than growing it further.
My Current Allocation
I lean heavily equity because I'm still in accumulation phase and have a long time horizon. My bond allocation is modest and consists mostly of short-duration Treasuries — I keep maturities short so I'm less exposed to the interest rate risk that hurt in 2022.
I think of it as: stocks for growth, bonds for sleep. Not a brilliant insight, but it's the honest frame.
Are you in accumulation mode or getting closer to needing the money — and does your current bond allocation reflect that honestly?
Frequently Asked Questions
Do I actually need bonds in my portfolio?
It depends on your time horizon and risk tolerance. If you're 25 and investing for 40 years, an all-stock portfolio has historically produced the best returns — bonds drag down growth during accumulation. As you approach retirement and need to protect against sequence-of-returns risk (a crash right as you start withdrawing), bonds provide a non-correlated cushion. The rule of thumb 'age in bonds' (hold your age as a percentage in bonds) is a starting point, not gospel.
What percentage of my portfolio should be in bonds?
Vanguard's target-date funds use roughly 90/10 stocks/bonds for investors in their 20s–30s, transitioning to 50/50 by retirement, then 30/70 in the later years. The classic 60/40 portfolio (60% stocks, 40% bonds) is designed for someone in their 50s–60s who wants moderate growth with lower volatility. Your specific allocation should reflect when you need the money, not your age alone.
Are bonds safe during a stock market crash?
Traditionally yes — Treasury bonds tend to rise when stocks fall as investors flee to safety. This negative correlation was the foundation of the 60/40 portfolio for decades. However, 2022 broke that pattern: both stocks (-19%) and bonds (-13%) fell simultaneously due to the fastest Fed rate hike cycle in 40 years. Rising rates hurt bond prices directly. Bonds provide crash protection against growth shocks, but not rate shock environments.
What is the 60/40 portfolio and does it still work?
The 60/40 portfolio holds 60% broad equity index funds and 40% investment-grade bonds (typically Treasury or aggregate bond index). It was the gold standard for balanced investors from the 1980s through 2021, delivering strong risk-adjusted returns. After 2022's simultaneous crash, many questioned its future. The consensus: 60/40 still works for protection against recession and earnings shocks, but may need a higher equity tilt or alternatives exposure to handle inflationary rate-shock environments.
When do bonds outperform stocks?
Bonds outperform stocks during deflationary recessions (2008–2009, early 2020), when the Fed cuts rates aggressively, and in 'risk-off' market environments where capital flees to safety. Over any 20-year period since 1926, U.S. stocks have never underperformed bonds. But in shorter windows — like a single bad year (2008: stocks -37%, bonds +5%) — bonds can be a portfolio saver. That single-year protection is what drives the case for a blended portfolio.
